How Do You Conduct Due Diligence On An Investor?

The best due diligence is the one you perform and initiate yourself, for the opinions of others will be biased by their unique experiences and shortcomings, not necessarily representative of yours. For the same reason, you do not rely on the waiter in a restaurant to recommend a dish.

One of my favorite techniques is to create some challenges and see how the GP leading the deal responds. You can tell a lot about a person from how they deal with conflict.

As in how I once refused to provide one of their silly analysts with market sizing data of a marketplace we were creating, and no market existed as of yet. The very nature of an outlier proposition.

Another way to challenge them is to question them deeply on their portfolio performance, separating the performance by GP, and by fund performance. Check what other venture firms they belonged to and their performance.

Talk to their other portfolio companies and investigate their performance, and talk to their limited partners (the investors in the fund) to ensure you do not have a nervous Nelly on your hand about to give you eternal internal volatility.

Challenge them on the alignment with your unprecedented foresight and walk them through what-if scenarios that, by virtue of their response, demonstrate how they intend to support you through thick and thin.

Ask what runway support they have allocated for your company. Too much round fragmentation and deal syndication are bad for ownership, control, and continuity.

You should do all of the above and more because venture capital as the arbitrage of innovation has, on the whole, failed to deliver consistent monolithic venture-style returns for limited partners and, on the whole, has failed to produce innovation to strengthen the renewal of humanity.

So, the arbitrage of innovation has a lot to prove here, not in the least that it can chart a new path, in the words of Einstein, to deploy the righteous thesis that determines what innovation can be discovered.

Challenge them the way you will be challenged to find out if you are made for each other. An investor who does not like to be challenged deserves an entrepreneur who will not accept the same.

Read up on more fundraising tips here.

Let’s lead the world by example with new rigors of excellence we first and successfully apply to ourselves.

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